Salomon Swapco Inc
Summary of Accounting Policies
Description of business
Salomon Swapco Inc is a wholly-owned subsidiary of
SBHC, itself a wholly-owned subsidiary of Salomon Inc.
Swapco enters into a broad range of derivative transactions,
including swaps, options and forwards on interest rates,
currencies and equities, with creditworthy counterparties
around the world. All of Swapco's derivative transactions
are hedged with offsetting trades with SBHC, leaving
Swapco with no market risk. Resulting credit exposure that
Swapco may have to SBHC is more than fully collateralized
by SBHC. The overcollateralization is designed to protect
Swapco from possible adverse market movements during a
termination period. Swapco has received credit ratings of
Aaa from Moody's Investors Service, AAAt from Standard
& Poor's Corporation, and AAA from Fitch Investors
Service.
Basis of presentation
The financial statements of Swapco are presented in
accordance with generally accepted accounting principles
in the United States and prevailing industry practice, both
of which require the use of management's best judgment of
estimates. Estimates may vary from actual results. The
financial statements are presented in U.S. dollars. Income
or expense denominated in other currencies is translated at
rates prevailing when the income was earned or the
expense incurred. Non-U.S. dollar denominated assets and
liabilities are translated at spot exchange rates prevailing at
close of business on the reporting date. The effect of
translating non-U.S. dollar currency balances into dollars is
reflected in current earnings.
Securities purchased under agreements to resell
Securities purchased under agreements to resell are
generally overnight agreements. They are carried at their
contractual amounts and are collateralized by U.S.
Government securities. Swapco takes possession of the
underlying collateral, monitors its market value relative to
the amounts due under the agreements, including accrued
interest, and when necessary, requires prompt transfer of
additional collateral or reduction in the repurchase
agreement balance in order to maintain contractual margin
protection.
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Salomon Swapco Inc
Summary of Accounting Policies
Investment securities and related hedge swaps
Under its operating guidelines, Swapco may invest in U.S.
Treasury and Agencies and other triple-A rated debt
securities. These positions are recorded at their market
value on a trade date basis. Swapco has entered into
interest rate swap agreements with SBHC under which
Swapco pays the total return on the investment securities
which it owns and receives the daily federal funds rate of
interest. These hedge swaps effectively protect Swapco
from changes in the market value of its investment
securities. Like the investment securities, the hedge swaps
are recorded at their market value on a trade date basis.
Their carrying value is included in the Statement of
Financial Condition in the caption
SBHC derivative
receivables.
Derivative receivables and payables
Derivative receivables (and payables) represent the net
mark-to-market amounts owed to (or by) Swapco from (or
to) individual counterparties under derivative transactions.
Each Swapco
®
customer transaction is matched by an equal
and offsetting transaction with SBHC. Derivative
transactions are recorded on trade date and are valued at
mid-market prices. Derivative receivables and payables
also include cash collateral advanced to or by Swapco under
derivative master netting agreements. Derivative
receivables and payables do not include the value of
securities pledged to or by Swapco.
Prepaid expenses and other assets
Prepaid expenses and other assets include, primarily, the
unamortized portion of sales commissions which Swapco,
up to September 30, 1994, paid to affiliated companies
when trades were consummated. Swapco recognizes these
payments as expense over the life of the transactions
involved.
__________
®
Swapco is a registered service mark of Salomon Swapco Inc.
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